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The October 2015 Cato Unbound issue discussed Private Governance. In one of the entries, Aaron Ross Powell raised a very interesting point that I've never seen properly addressed yet: What is the difference between private and public? Is there any difference between a State and a large club?

Sticking to the tangible, we get chiefly two examples from Stringham: private police and gated/private communities. Focusing on those, then, is there a meaningful way to tell which police/communities are public and which private without simply pointing at the one that’s declared itself public and then deciding the rest are necessarily private?

In a system only of private governance – i.e., with no organization labeling itself “the state” – we’d necessarily find ourselves in private communities patrolled by private police. We’d choose which community to live in and signal our acceptance of that community’s rules by buying into it. If the community provided any services at all – as nearly all do – we’d pay for those services via something like homeowners association (HOA) fees. Stringham mentions such a setup several times, and labels each “private.” If we don’t like the rules the HOA or community owner dictates, we might run for the HOA board, vote in HOA elections, etc. If things get bad enough, we might move somewhere else.

Our private communities would use some of those funds they take in from their residents to provide security. And just as with a shopping mall owner hiring a particular firm to provide security guards within his building, the community would likely hire a single firm – if it doesn’t run the security itself. It’s unlikely it would allow competing firms, or allow me to hire my own police and my own courts for just my house, just as the mall owner wouldn’t let competing guard agencies move in on his approved agency’s turf.

The first way would be appealing to an ethical distinction: the State does not own the land it claims sovereignty over, but people, HOAs and clubs do. Unfortunately, this isn't much interesting, because it tells us llittle or nothing about how they may work differently.

I first came to this problem by reflecting upon the socialist calculation problem. There are some who say that the key to fix the problem is just to allow private property to flourish. But that's surely wrong, or at best, incomplete: Just imagine a rightfully homesteaded chunk of land the size of the Soviet Union, where the owner decides to implement a centrally planned economy. Are we to believe that the laws of economics will yield a different result just because of the ethical rightness of this situation? No. The fact that the URSS is now a huge private property makes the market work? No. Therefore, it was not a problem of property rights, it was a problem of information (And to solve that large scale coordination problem, property is a necessary, but not sufficient condition. You need, say, subdivisions of property).

Here we have a similar situation: Obviating the ethical details and focusing on the actual functioning of private and public governance, the distinction between what is a State and what is just a private club with a bunch of rules and fees doesn't seem that clear.

Perhaps it is because governments and private governance exist in a continuum, with no clear point to delimit them. Or maybe there is something they don't share that makes them different.

In some understandings of property rights, they are absolute, i.e. owners can do literally whatever they wish to do in their property. In that sense, they would enjoy the same level of sovereignty as a State. They could act as a final court, have police, collect user fees ('taxes') and do the things States usually do. It would then be hard to say that a large plot of privately owned land that collects fees, provides services to the public, has its own courts and police, etc, is not a State. So if a HOA had full authority over its property in the described way, you could well call it a local, or sublocal government, privately owned.

But I think that such an understanding of property rights, for reasons I won't present here, is wrong. In the standard treatment of property rights, they are not absolute, and may be breached in some cases. This is not a particularity of property: there is rarely any moral property that is held to be absolute. So to speak, the idea of sovereignty is tightly linked to the idea of strong propertarianism and in fact, it's hard to argue that the strongest form of property rights and sovereignty are separate things.

So it seems that, in the end, the difference between a State and a private governance institution, whatever its size, is that the private governance institution acknowledges its lack of sovereignty, and it is bound by outside law, while the State doesn't and isn't. Citizens can't go to an outside or impartial arbiter and sue a State because it has raised taxes, for example, while they could if a HOA breached its statutes.

But what if the HOA is internally democratic? Then people would have agreed to abide by the results of the majoritarian vote. In what sense is this now different from a State?

Even if a HOA is privately owned, and internally democratic, and with a provision in the contract that any disputes between the HOA and someone has to be settled by a Court belonging to the HOA itself, as long as the HOA accepts external challenges to its own regulations, it won't be a State. This would be a resident who disagrees with having a dispute with the HOA settled in the HOA's court, and asks another court to judge it. Socially, for this to work, there should be a common understanding of what the Law within which private properties operate is, and that includes that disputes between two parties have to be judged by an impartial arbiter, and if there are suspicion to the contrary, it should be possible to challenge abusive court-binding clauses. However, if the HOA's own court is generally known to be fair, then we could argue that it could judge cases against itself, but since it is easier to find a truly third party than to assess the objectivity of one as his own judge, the prevailing norm will be to always have third party arbitration, even if a clause in a contract says otherwise.

Two final thing to discuss. One, even though I've claimed that you can have private governance institutions that are indistinguishable from current forms of government, they need not be. Private governance institutions, both for and not-for profit, will tend to be smaller, more focused in a particular aspect of what needs to be governed. The State is seen as some sort of expression of societal desires, and politicians try to shape society in many ways. You have great clashes of diverging opinions crystalised in political parties, each proposing an entire vision of how society ought be. Private governance institutions, if they aren't seen, and they don't perceive themelves, this way, will tend to just focus on those issues that require a third party to fix. They won't, in most cases, try to shape the area under their jurisdiction to follow a great plan. Imagine a Neighborhood Association that mandates its members to, say, pay extra if they buy from other cities. Or a HOA that tries to mandate residents to socialise their wealth within the HOA. While those could exist, they will probably be rare. The set of things that a institution will need to do to be succesful depends on what people want it to do, and where there is most agreement in that is in basic norms of cooperation. Beyond that basic scheme, the 'market' for that private institution will be smaller. Neverhtless, a private institution that tried to shape its society with a vision behind could exist. Imagine a privately owned piece of land the size of Singapore, ran like Singapore. It could be called a Private City, and only a (private) State if they claimed sovereignty.

Two, Stringham notes here that what makes private institutions work is that people can choose them. But this mechanism, to be sufficiently useful, requires a certain variety of private institutions. In the case of the real Soviet Union, one could say that the residents chose it by staying there, same for the private Soviet Union described above. While the real SU was coercive, and the private one would not be, they would work in roughly the same way if both are sovereign. Private Cities may work because you can have many of those in an area. Perhaps even it would work best to have federated Private Neighborhoods, with some services provided by the city. But as the scale of the private institution becomes larger, saying that people are choosing it becomes less clear, and thus the mechanism that keeps the institution efficient and nice breaks down.

To sum up,

The problematic issue here is one of how an institution works, not of ethics.

The public-private distinction is not all or nothing from a functional point of view, there is a gradient between them.

Strong propertarianism (i.e. in the Hoppe-Rothbard tradition) entails the possibility of sovereignty and of legitimate States. Some private governance institutions would indeed be States under this view.

Moderate (common sense) property rights conflict with sovereignty [1]. It is then possible to distinguish a State from a similar private governance institution without reference to an ethical point of view: The State claims for itself sovereignty, and the private governance institution does not.

Private Cities can be called local governments, but won't be States unless they claim sovereignty.

Private institutions are disciplined by the market in so far people are choosing them. But for this to work, they need alternative institutions that they can reasonably join.

EDIT

Some examples of sovereign vs non-sovereign institutions.

A Homeowner Association has in its covenant that disputes with the HOA will be settled by the HOA. The HOA managers one day decide to raise fees 50% to donate it to Subsaharian Africa (Presumably, because they were a secret gang of Effective Altruists). Some residents go to the HOA's court, and predictably, are defeated. They decide to appeal to an external arbitration party or agency. If the HOA refuses to comply (And always does so), it means it regards itself as sovereign. If the HOA complies, and the external court decision binds the HOA (Lower the fees to what they were before, restitute residents for extra payments, if needed, etc) then it is not sovereign.

An Industrial Park has in place pollution and CO2 regulations for the factories inside it. Some people in a city nearby think the regulations they have are not good enough, and so ask the Industrial Park to raise them, on the grounds that their emissions are above the rights-violating threshold. If the Industrial Park is sovereign, they'll laugh and keep doing what they were doing. If it isn's sovereign, the matter will go to a court, and with input from scientists, measurements of emissions, and past rulings, and be settled there.

A large group of fishermen, who have studied economics, know about coordination problems. They notice that a large, open-sea fishery is currently being overfished due to there not being property rights. They talk to many fishermen organisations that work in that area, and decide to jointly take the whole area under their control, forming a Fishery Cooperative, with powers to regulate fishing and related matters, in that area. The cooperative works well for some years, but some fishermen associations that are part of the Cooperative believe the models being used to calculate the optimal capture per year are somewhat wrong, and that more can be fished per year. They ask for permission to fish more. If the Cooperative is sovereign, they won't be able to fish unless the cooperative decides so. If the Cooperative isn't sovereign, the possibility (not necessity) exists of a court hearing the arguments, which may then decide to carve a small part of the Cooperative's plot of ocean for the dissenting cooperatives, effectively creating two organisations.

These solutions may seem to some as not fully 'private', but I think this is how a polycentric justice system would work things out.

[1] Which is why John Locke and others were decried as anarchists back then by defenders of absolutism. (See Smith, G. H. (2013). The system of liberty: themes in the history of classical liberalism. Cambridge University Press. Chapter 5)